108 Greenwich St., 5th Fl New York, NY 10006
For personal assistance, call
877-880-8086
Get Started

Business Lines of Credit: At a Glance

How does a business line of credit work?

Get access to a revolving balance of credit that you can use for a variety of purposes.

What is a business line of credit good for?

Uses include:

  • Hire and train new employees
  • Buy inventory
  • Renovate your location
  • Improve cash flow

How to qualify for a business line of credit

Lenders prefer to work with businesses that are well-established and in good financial standing, thus providing their ability to pay back the loan.

Excel Capital offers the best small business line of credit with monthly payments. To learn more about how to get a business line of credit click here.

Lines of credit are designed for the business owner who wants flexibility with the way term of repayment. 

They have a flat fee per month that gives you the flexibility to draw down as much as you want, when you want, and only pay for the time period you use the funding for.

So, if you pay the line of credit back in 1 month you only get charged the 1-month’s fee. 

However, while most small business owners are familiar with the term “business line of credit” (or Business LOC for short), they don’t fully understand what they are and whether or not a business line of credit would be of use to them and their business.

Nor do they understand how this can be different from a small business loan or term loan.

There are multiple financial products that fall under the LOC umbrella, along with a variety of uses, so in this guide, it’s our goal to help you understand the difference.


2 Types of business lines of credit

For starters, there are two main types of credit lines offered:

Secure line of credit

  • Requires collateral
  • Lower rates

Unsecured line of credit

  • No collateral required
  • Higher rates

Each type of line of credit has its own unique benefits. Which of the 2 you choose will depend on your business needs:

1. Unsecured: An unsecured business line of credit doesn’t require collateral, however, the line of credit is typically smaller along with a higher interest rate when compared to a secured line of credit.

2. Secured: A secured business line of credit interest rates are cheaper, making it the more attractive option for business owners. However, because they’re riskier for lenders, they need to be backed by some sort of asset usually commercial real estate or other assets.

That collateral can be capital such as property, however, it typically comes in the form of inventory, accounts receivable, or something else. If you’re unable to pay back the loan, your lender may seize that collateral to pay the balance.

Figuring out which of the above types of business line of credit is best for you and your business is an important part of the process of applying for a line of credit for your small business.

Before applying, consider various factors such as the state of your business cash flow including your average ledger balance in your bank account, your revenue and your accounts receivable and the forecast for the coming year to decide which would better fit your unique situation.

With that said, let’s talk about how lines of credit actually work and why they’re useful.


How a Business Line of Credit Works

A business line of credit works differently from most types of financing…

  • A business line of credit uses revolving credit.
  • Once approved, you get access to a revolving balance of credit which you can use for a variety of purposes.
  • As you pay off your balance, that credit becomes available again and the process can be repeated for the length of the credit line.

How an unsecured business line of credit works

How a line of credit works is quite different than your average loan. A commecial line of credit uses what is called “revolving credit”.

Revolving credit is exactly what it sounds like: once approved, you get access to a revolving balance of credit which you can use for a variety of purposes.

As you pay off the balance, that credit once again becomes available and the process can be repeated over again for the length of the credit line.

For that reason, lines of credit work much more similarly to credit cards than traditional loans, which offer a lump sum once and then you’re done.

However, they’re different from business credit cards in many ways as well.

With credit cards, you get a preset spending limit.

However, while similar, with a line of credit for small business it’s not so much a preset spending limit as it is a max approval amount.

This gives you the flexibility to draw down as the need arises until you’ve maxed out the line of credit. Typically, with either 6 or 12-month repayment windows.

Once requested, the funds are then either wired or ACH’d directly into your business checking account.

This is different than a credit card since you have to swipe the card with a vendor who accepts credit cards if you want to use the funds. In addition, if you need cash you have to pay hefty fees.

Once maxed out, you can continue repaying and reusing the funds within your line of credit provided you make payments on time and never exceed your credit limit.

Many business owners confuse Business Lines of credit with unsecured loans or merchant advances but they are very different.

With business LOC, you only pay for what you use and keep the unused funds on reserve for emergency business needs with no cost of funds.

As long as the line of credit is open you do not need to go through any more underwriting or submit any more paperwork

This way you have the comfort of knowing you have access to capital with the click of a button without any paperwork or waiting.

Complete our online application and see how much you can be approved for: Apply Now


Business lines of credit vs. business loans: What is the difference? 

Now that you understand what a line of credit is, it might be confusing trying to compare the difference between a LOC  and a business loan product.

So, before we continue, let’s talk about it. 

While revolving credit is an open balance you can tap into whenever you’d like– provided you’ve paid the balance down– a more traditional installment or term loan is a single lump sum.

With an installment loan, you’re approved for a specific amount of financing, which you then turn around and begin paying off with installment payments. 

Once that loan is paid off, the transaction is finished and you’ll need to obtain another loan to get financing again. 

With a commercial line of credit, you borrow however much you’d like within your credit limit, repay that amount, and then borrow again. If you’d like to borrow a different amount next time, you can so long as it’s within your approved limit.

While installment loans tend to be larger sums for bigger one-and-done business purchases, such as equipment financing, they also have much less flexibility than a line of credit.

Ultimately, it all comes down to what you need financing for (which we’ll dive into in a moment). 

But first, let’s give you an example of how a business line of credit works. 

Business line of credit: An example

Jen, the owner of a rustic restaurant and bar in Texas, is approved for a $30,000 unsecured business line of credit. 

She needs $10,000 for renovations, but she also regularly needs financing for menu updates and cash to stock new ingredients before those items debut on the new menu.

Getting a business line of credit gives her the flexibility she needs to pay for those renovations, then after paying down the balance, use another $15,000 for further renovations and seasonal menu changes on a biannual basis.

Once Jen has repaid that $15,000 balance, she then has the full $30,000 available to her once again without having to apply for another loan.


What is a Line of Credit Good for?

A line of credit has a number of uses:

  • Seasonality and slow periods: You can stock up before a busy period of buffer against a slow one.
  • Your clients pay on NET 30 or longer: If your clients take a while to pay, an LOC gives you a pool of cash you can dip into between payments.
  • You need cash for materials: A LOC can front the cost of materials on a job before you get paid.

What is a Commercial line of credit good for?

Because you can’t pay your rent or payroll with a credit card, combined with the increased difficulty of being approved for a traditional loan from a major bank, if cash runs low, as a small business owner your options are sparse for injecting the business with the cash it needs to keep things running.

Getting a business line of credit is useful because it gives you the flexibility of having a cash equivalent to handle such situations.

For all intents and purposes, having a line of credit is similar to a savings account that you can dip into as needed with the ebbs and flows of your business cycle.

When cash runs low, you can use your line of credit to get the funds you need to maintain daily operations and keep things chugging along. This is invaluable for small businesses where the inability to pay for daily expenses can be a death sentence.

However, a business credit line is great for several other reasons as well. One of the best uses is in expanding your business.

If you’re entering a busy season, expansion period, or sales are just picking up and you need the extra funds to:

  • Hire and train new employees
  • Buy inventory
  • Or renovate your location
  • Cash flow
  • Working Capital

Then a line of credit can provide you with the funds you need to grow your business without it holding back your daily operations.

The uses are virtually limitless, with a business line of credit having the potential to be used for everything from supplementing cash flow to aiding growth and covering unexpected expenses.

Most business owners like having a working capital cushion that they can use without having to actually take a loan. A business line of credit gives you the peace of mind knowing that you have access to capital without having to go through an application process.

Pros & Cons of an Unsecured Business Line of Credit

Is an unsecured business line of credit a good fit for your business?

  • You only pay interest on the funds borrowed
  • Can be used for any business purpose
  • Can be approved on bad credit
  • A good way to build credit
  • Cash available whenever you need it
  • Rates may be higher due to no collateral

Pros and Cons: Should you choose an unsecured business line of credit?

We’ve touched on the utility and flexibility of  business lines of credit, but now let’s jump into specifics.

What are the pros of an unsecured business line of credit? Are there cons to weigh? 

Here are the pros and cons of a line of credit: 

Pro: You only pay interest on the funds borrowed

When you apply for an installment or term loan, you get approved for a specific amount. If the minimum is $20,000, but you only need $15,000, you’ll end up paying interest on the full $20,000.

However, with a business line of credit, you’ll only pay interest on the amount you draw from the credit line, saving you on interest and giving you flexibility on how to payback and take out more funds. 

Pro: Can be used for any business purpose

Many finance tools are specifically designed for a purpose and are restrictive in what they can be used for. That’s great if all you need is to replace a piece of equipment or put a down payment on a new property, but not ideal if you have a varied need for cash.

If you could use funding for several areas of your business, an unsecured business line of credit is likely much better suited for your needs.

Pro: Can be approved on bad credit

One of the biggest pros of an unsecured business line of credit is that you don’t need perfect credit to be approved. In fact, you can even be approved for a business line of credit with bad credit n some cases. However the business line of credit rates for bad credit applicants can exceed 3.5% per month.

If you can’t be approved for a bank secured line of credit (which requires collateral such as cash savings or property to secure the credit line), an unsecured business line of credit could be in your reach. 

Pro: A good way to build credit

Not only do you not need perfect credit to be approved for an unsecured business line of credit, because they can be used repeatedly, they’re a great way to build your credit. 

Each time you draw down your balance and begin making repayments, those payments are reported and help build your credit up so you have more borrowing power as your credit grows. 

Pro: Cash available whenever you need it

A line of credit gives you the flexibility to borrow the exact amount you need, so that you don’t have to pay interest on a larger amount. However, it also allows you to tap into that pool of credit whenever you need it.

Just got done repaying your balance? You can keep that credit line in your pocket for when a big order comes through, an emergency hits, or until your next busy season. You choose when to tap into your credit line, so the power is in your hands. 

Con: Lower credit score may result in higher rates

It’s important to keep in mind that because an unsecured business line of credit is exactly that, unsecured, rates tend to be higher than on secured loans.

Secured loans require collateral, hence that collateral “secures” the loan for the lender in case you fail to repay that loan and the bank needs to collect on what is owed to them. 

But with an unsecured business loan or line of credit, you don’t put down any collateral. That means if you default on your loan, you won’t lose any precious collateral.

With that said, the offset the potential loss, depending on your credit and business health, your rates may be higher than what you’d pay with a secured loan. 

Is a business line of credit a good fit for your business?

With those pros and cons laid out, knowing whether or not a business line of credit is the right financing tool for you should be much clearer.

However, with that said, here are a few points that can help you decide whether you should consider a business line of credit vs. another type of business financing:

  • Is your business seasonal by nature?
  • Do you make regular cash-intensive updates to your business?
  • Do you invest or pay large deposits for product or supplies before you’re ultimately paid on future sales?
  • Do your customers pay on Net 30 or longer terms? 

If you answered “yes” to any of the above questions, an unsecured line of credit may be a good fit for your business. 

Having a good store of savings whenever your business needs it is ideal, but with the constantly shifting demands of running a business, that’s often very difficult if not impossible to maintain, especially for a small business. 

A business line of credit is the next best thing: a recurring source of capital you can borrow from– however much, and however often you need. 


How is a commercial line of credit repaid?

With credit cards, you have the option to do minimum payments over the life of the account and accrue interest charges on the outstanding balances.

Generally, these minimum payments are at roughly $25.00 per month or based on a percentage of your outstanding balance.

However, a business line of credit works a bit differently.


What are the business line of credit rates?

With our flexible programs, the rates start at 1.5% per month and can go as high as 9.5% per month. We do not charge any draw down fees like most other firms offering lines of credit and you do not get penalized for early payoff.

Business line of credit rates and repayment terms are different as well. Since most business lines of credit are based on 6 or 12-month revolving periods, the repayment schedule is set according to the amount drawn down, the cost of funding, and the term.

We offer business line of credit bad credit and good credit options.

However, every institution has its own rate and fee schedule so make sure to ask when looking for the best business line of credit for your business. 

Business line of credit rates and terms: A brief example

Unsecured LOC rates can vary from individual to individual but what makes an unsecured line of credit truly a great loan product is how flexible the unsecured line of credit rates can be. Below is a quick example of how the business line of credit rates and repayment terms work.

If you’re approved for a $150,000 unsecured line of credit on a 6 or 12-month term with a monthly fee of 2.75% and you draw down on $30,900.00, your payment schedule will look like this:

This is a typical line of credit schedule for a business with a sub-680 credit score. The above are typical example rates, however, rates can be as low as 1% per month.

Complete our online application and see how much you can be approved for:: Apply Now


How to Get a Business Line of Credit

Your business will need to be in good standing. In addition, you’ll need to fulfill these requirements:

  1. Time in business: At least 1 year
  2. Credit score: 540+
  3. Annual revenue: $50,000
  4. Less than 3 negative occurrences in your bank account in the last 90 days.
  5. Complete application along with your last 4 months of business bank statements.

How to get a business line of credit

So, now you’re thinking: “This all sounds great– but do I qualify?”

Both secured and unsecured business lines of credit require your business to be in good standing.

However, it’s easier than ever to be approved and the minimum requirements allow even young businesses to be approved, provided you’re in good standing (albeit for smaller, shorter-term lines of credit).

What Are the Requirements?

If you are a business owner the first thing you probably want to know is the business line of credit requirements. There are several requirements for a business loc but compared to other types of loans a business LOC requires fewer docs. We will break down all the requirements below.

Both Secured and Unsecured Business LOC’s will require your business to be in good standing.

All lenders typically prefer to work with businesses that are well-established and in good financial standing, thus proving the ability to pay back the loan. Various financial documents may be requested to support this. Here are some basic qualification requirements:

  1. Time in business: At least 1 year
  2. Credit score: 540+
  3. Annual revenue: $50,000
  4. Less than 3 negative occurrences in your bank account in the last 90 days.

Keep in mind that the funding amount, duration of the credit line, and repayment terms all depend on where your business stands in terms of credit rating, history, revenue, and several other factors.

What Documents Do I Need to Qualify for a Commercial Line of Credit?

Both Secured and Unsecured Lines of Credit will require your business to be in good standing.

All lenders typically prefer to work with businesses that are well-established and in good financial standing, thus proving to the ability to pay back the loan. Various financial documents may be requested to support this. Here are some basic qualification requirements:

  • Completed application
  • Last 4 months of business bank statements
  • Or completion of our online application

Once approved, You will have access to your funds electronically via our secure portal.

You will have the ability to draw down as much as you have available electronically and payback whenever you feel like.

Keep in mind Payments will be debited out of your account electronically once a month until it is paid in full.

From the flexibility to pull out cash when your business needs it to always having the funds available to invest in growth, a line of credit allows your business an unrivaled level of flexibility and reliability.

Complete our short one-page application and see how much you can get approved for today: Apply Now

5 Things You Should Know When Applying for an Unsecured Business Line of Credit

Here are 5 things you should know about an unsecured lines of credit:

1. They’re different from the secured bank loans you’re familiar with (unsecured vs. secured lines of credit)

A traditional business bank loan, the only major type of business loan available to business owners until around the turn of the century, is typically secured.

A secured loan is one where some form of collateral is used to guarantee the loan amount to the lender.

Think of this way: You ask an acquaintance to borrow $100 of which you promise to pay back within 30 days (your specified repayment date).

However, while this acquaintance knows a bit about you– maybe they’re a coworker– they don’t know you well enough to take you at your word alone.

They require something to make sure that, even if you weren’t to pay back the loan, they wouldn’t be out $100. So, you let them hold onto something of yours that is of roughly the same value.

This is loosely the same thing a lender does.

They will run a credit check, (some will be a soft check and some institutions might do a hard credit inquiry) study your business bank statements, and the like to mitigate their risk, but they’re a business. So, they need a way of guaranteeing they’ll get the money back that they’re lending.

And that’s where the secured part comes in.

A secured loan uses collateral to secure the remaining loan balance in the event that the borrower can’t pay back the loan. This collateral can be cash savings, property, vehicles, or anything else relatively liquid.

However, an unsecured loan doesn’t require traditional collateral.

It may require a percentage of future invoice sales, a kind of “soft” collateral. But if your business closes down, you’re not on the hook for the remaining balance. (Whereas you’d lose the collateral you put down in the case of a secured loan.)

2. Pay attention to fees

All financing products have fees. However, it’s important to understand that because a line of credit (or simply LOC) works differently from other types of loans, some of the types of fees are a bit different as well.

One of the more unique fees subject to a business line of credit as opposed to a traditional loan is a transaction fee.

Most lenders will charge what’s called a drawdown fee each time you draw from your line of credit. (At Excel, we do not have drawdown fees.)

In some cases, a maintenance fee may also be charged as well by the lender in exchange for their continued maintenance of your line of credit.

3. Is it a variable or fixed interest rate?

Many loans offer a fixed interest rate, some a choice between fixed or interest.

However, typically, a line of credit uses a variable interest rate which is a percentage of and fluctuates based on the prime lending rate.

Most unsecured business credit lines carry a fixed cost of capital that accrues monthly and carry a higher overall rate.

Secured lines of credit that are backed by property typically come with a variable interest rate due to the lower overall rate.

It’s important to consider what your lender is charging you in terms of interest on their business lines of credit.

Use that information when considering who to work with and how much you’ll pay in interest with a line of credit vs. something like a short-term business loan.

4. You can use a line of credit as many times as you’d like (provided you pay off the balance)

A business line of credit is unique among lending vehicles, so it’s sometimes misunderstood.

As opposed to being a one-time sum of money that is repaid at a specified interest rate, a business line of credit can be borrowed from repeatedly.

Provided you pay off the balance of the line of credit, you can use it again, pay it off, and use it again.

This makes it entirely unique among business financing vehicles. And it’s specifically useful for businesses that consistently need cash for investing in supplies or creating product long before obtaining a return on investment.

5. The Small Business Administration (SBA) offers several types of secured and unsecured business lines of credit

One of the SBA’s most popular lending programs is the SBA CAPLines programs.

The SBA’s CAPLine program is a collection of several business lines of credit, each with their own terms and conditions (typically offered through their flagship 7(a) loan program but can be offered as a standalone LOC).

The SBA CAPLines program offers these LOC programs:

  1. SBA Seasonal CAPLine: For seasonal businesses, whether it’s pay for supply or making additional hires before a busy season.
  2. SBA Contract CAPLine: Used to pay for labor and material costs with assignable contracts.
  3. SBA Builders CAPLine: Capital for contractors to build and/or renovate residential and commercial real estate.
  4. SBA Working Capital CAPLine: Gives businesses the ability to use short-term assets (invoices, etc.) to get working capital.

Lastly, keep in mind that the SBA doesn’t offer unsecured business lines of credit directly.

Instead, they match small business owners with lenders through their Lender Match program, helping them secure the funding they need.

Learn more about the SBA’s CAPLine business line of credit program.

Utilize the flexibility of an unsecured business line of credit

An unsecured business line of credit isn’t just the most flexible form of small to medium business financing.

With no collateral necessary there’s little risk involved for you as the business owner as well.

But an unsecured business line of credit isn’t for everyone.

Maybe you’d prefer a lower interest rate in exchange for collateral. Or maybe you need a larger single sum (which an unsecured business loan can fill the role of) of capital.

Whatever the case, now you know what an unsecured business LOC has to offer and how it can help grow your business.

And the more informed you are, the smarter choices you can make to keep growing it.